Thursday, December 10, 2015



Dreaming of 10 per cent

The finance minister smiles in the midst of darkest times, but the smile seemed broader when he announced the quarterly GDP growth estimates last week. When asked about his expectations for the current financial year, he said they knew no limits. Such cheer, such optimism, such vaulting ambition, are not native to managers of economies, who tend to be rather portentous, brooding, beetle-browed worthies. Although the kudos belongs to economy, some of its shine rubs off on the messenger of its good fortune, which none can grudge him. The sunshine is as much for him as for us to enjoy.
Quarterly growth figures are about as significant as the outcome of a one-day international. Just as there will be another day and another ODI, there will be another quarter and another set of figures. It would be better if members of Parliament exhibited transports of ecstasy or bursts of rage over GDP figures than over cricket matches. But they do what they are good at; whether they are good at cricket or not, they are no good at managing the economy. So it is just as well they are clueless about growth; the economy is probably better off for their neglect.
The growth rate in April-September is the highest semi-annual growth in recorded history. The recorded history reaches back only eight years; before 1998, growth figures were more likely to disappoint than exhilarate, so the government did not come out with them more frequently than once a year. Even now, the data on which quarterly figures are based are skimpy; the only reliable figures are the final annual ones, and the Central Statistical Office takes over a year to publish them.
Whilst this scorching growth may be a flash in the pan, a look at the past three years suggests that it is not. The 2006Q3 growth of 9.1 per cent comes on top of 8.9 per cent in the same quarter last year, which makes 9 per cent over a two-year period. This growth is not based on accidental factors or base effect; there is greater likelihood that it will stay.
The realization that it will is reflected in financial analysts’ forecasts for this year. Those made last year hovered around 7 per cent. The habitually cautious analysts were tempted by the figure but could not quite bring themselves to touch it; their forecasts clustered in the 6.5-6.9 per cent range. Then, as one dazzling quarterly figure followed another, they one by one started pushing their forecasts gingerly forward. Even now, none of them is prepared to stake his head on 9 per cent for this year; after the next quarterly figures come out at the end of December, they will – just a quarter before the end of the year of forecast. Growth forecasts are more often the product of constipated imagination than of solid technique.
Whilst 9 per cent is within reach of analysts’ imagination, 10 per cent is still only in the realm of the finance minister’s dreams. One dark cloud that figured in his dream was inflation, hovering just above 5 per cent in the past few weeks. He banked on good harvests. To leave it to the weather gods befits a good Hindu. He also placed some confidence in supply management, by which he no doubt meant release of foodgrains and sugar. No wonder the government does not believe in freeing agricultural markets.
But the finance minister has no doubt read Milton Friedman, who had another view on inflation. In his view, inflation was an entirely monetary phenomenon. Applying it at home, inflation is entirely due to the fact that the Reserve Bank ensures money supply growth of 15-16 per cent – indeed, forces it to growth at that rate. Given that the economy is growing at 9 per cent and given some monetization of the economy, it thereby mandates inflation of 5-6 per cent. If Mr Chidambaram asked RBI to bring down money supply growth to 10 per cent, inflation would stop in its tracks.

But he will not do it because the government needs that extra money. Money issued by RBI is a perpetual interest-free loan by citizens to the government; which finance minister would give up loans that he never has to repay? And the government’s banks live on infusions of money; the greater it is, the more they can lend. So unless the government cures itself of addiction for fresh money, inflation cannot be brought down. Let us be thankful that the government limits money supply growth to 16 per cent and inflation to 5 per cent; that is our good luck.